Stability At The Federal Reserve

May 18, 1986

The handicappers have been busy trying to figure out whether H. Robert Heller, President Reagan`s latest nominee to the Federal Reserve Board, will join the ``Gang of Four`` to challenge Fed Chairman Paul Volcker`s cautious course.

Mr. Heller, whose nomination faces a confirmation vote in the Senate, has described himself as pragmatic and a ``free-marketer.`` He has been described by others as an independent and a supply-sider--but no ideologue. So it`s sort of hard to predict that he will always come down on one side or the other.

There was a time when challenging Mr. Volcker would have been unthinkable. Upon his appointment by former President Carter in the dark days of 1979, nervous markets worldwide heaved a sigh of relief. This man, all agreed, is steady, a brilliant technician and a diplomat.

It worked. It was painful, but Mr. Volcker led us out of that awful situation. Economically, the country today is in far better shape. This has been reflected in Mr. Reagan`s four appointments over the last two years to that seven-member board. They generally have favored a more expansive monetary policy than Mr. Volcker would like.

One of those, Vice Chairman Preston Martin, up and quit. Now comes Mr. Heller to serve out his term, although not to assume his title. (That goes to Manuel Johnson, who was appointed in February.)

Mr. Heller brings significant international credentials to the Fed. He served as chief of the financial studies division of the International Monetary Fund in Washington before leaving in 1978 to join Bank of America, where he has been an international economist. Mr. Heller is said to be knowledgeable about the international debt situation and to have a commanding grasp of the exotic new financial instruments spawned by deregulation.

This kind of experience is invaluable in an era when currencies and markets are as interlinked as they are.

Whether he will subscribe to Mr. Volcker`s well-known cautions will be a factor in determining monetary policy. But even if he does become the fourth vote for the ``Gang of Four,`` Mr. Volcker still holds a clear majority on the policy-setting 12-member Federal Open Market Committee, made up of the Fed board and five presidents of the Fed`s regional banks.

That should be reassuring to the markets and the country. Mr. Volcker has a towering presence worldwide. Under his leadership, the Fed has provided stability for the markets and, despite his reputation for opposing rate reductions for fear of inflation, Mr. Volcker voted in favor of the most recent discount rate cut.

Things may be a lot better now but they surely aren`t perfect. The nation faces huge budget and trade deficits. This is no time to be considering any kind of shift in basic monetrary policy. Steady as she goes with Mr. Volcker at the helm is as propitious a course as we can hope for.